A private company is based on shares. However, unlike a public company, these shares are not traded in the stock market. And so, these companies are often referred to as ‘unlisted companies’.
The shares are privately held by closely knit groups. Most of the people who own the shares in a private entity tend to be those close to the founder, such as relatives, friends, angel investors, and employees.
Private companies aren’t necessarily small businesses just because the shares cannot be traded. Although most private companies are run as small businesses, there are some large corporations that continue to run as private entities. For instance, Google India is a private limited company.
In case a private company wants to increase its funding, the next step is to raise resources from venture capitalists or through a private placement. Venture capitalists specialize in high-risk and high-return businesses, while private placement can be done by institutional investors.
A private company can also choose to become a public company by issuing shares to the public. This is called IPO or Initial Public Offering. Once a company goes public, the stocks are traded in the stock market.
For example ICICI Prudential Life Insurance changed its private structure and went public in 2016. The insurance company raised a whopping INR 6057 crores. It became the second largest IPO in the country and was the first IPO by an Indian company.
Private Company Examples:
Here are a few examples of some well-known brands that operate as private entities:
Under Section 2 (68) of the Companies Act, 2013, a Private Limited Company refers to any company that has:
Funding can come from various sources such as - Angel investors, seeding funding and venture capitalists.
Funding cannot be raised from the public since the public subscription is prohibited.
Existence and Maintenance
A private company has perpetual succession and does not depend on its owners or shareholders for its survival.
A company would have to abide by statutory compliance mandates audits, tax filings, etc.
Costs and Profits
The profits of the company can be distributed to the shareholders via dividends
The company registration is high. Also, the company will still have to deal with higher income tax slabs and costs of compliance & statutory maintenance.
Allotment of Shares
The founder can choose who holds the shares in the company. ESOPs can also be issued to deserving employees as a reward mechanism.
Private companies have a restriction on share transfer. The existing shareholders would have a say if another shareholder wishes to sell his/her shares
The owners’ liability is limited to the value of the shares held by them. This leaves their personal finances protected.
The company would have to meet all its financial obligations with its revenues, and can only take loans to manage any such financial deficits.
Despite the lack of access to public funds, large companies choose to remain private because:
Example: The founder of a public company cannot take any decision on his own and must call a board meeting and general meetings. However, in a private setup, the founder can easily sway the few shareholders in his favor, even more so if he has maximum holdings.
To encourage quicker registration timelines, the Ministry of Corporate Affairs (MCA) has enabled a fast-track registration process. The registration process can be done online, and supporting documents are submitted in the electronic formats
The members of the company who will be involved in the incorporation of the company would need to have a DSC. The DSC of the first shareholders would be needed to sign the e-MOA and e-AOA of the company to upload the same with the Registrar of Companies (Roc). This makes DSCs for the first subscribers or promoters mandatory. Additionally, the proposed director would have to obtain a DIN, for which the DSC is compulsory.
Documents for DSC:
The DIN numbers of the proposed directors are required to be intimated to the Ministry in the incorporation forms. Therefore, DIN is mandatory for the proposed directors of the company.
Documents for DIN registration:
Before incorporating a company, the name of the company is to be reserved. To reserve the name of a new company or change the name of an existing company, a simple online service called RUN (Reserve Unique Name) is used.
Here are a few guidelines by the MCA while picking a company name:
The application for the company name is processed by the Central Registration Centre(CRC) under Non- Straight-through Processing mode. The CRC will conduct a comprehensive check and give its approval or rejection of the name. Each name submission is to be accompanied by fees of INR 1000.
Once the name is approved, it is valid for:
The Memorandum of Association and Article of Association are essential documents for the incorporation of any company. Both of these documents define the internal and external relations of the company with its stakeholders.
Both these documents are drafted by professionals and must be submitted along with subscribers’ sheet, which contains the DSCs of all the founding members.
Once the necessary documents have been prepared, the following form will have to be filed to incorporate the company.
The following supporting documents would also have to be attached to these forms
Note that, Form INC-22: Details of registered office address (might be required later if proof of address is not filed with the SPICe form)
Once all the procedures for company registration are complete, the Certificate of Incorporation will be issued to the company.
Although the tax slabs of a private company are high, there are considerably more attractive than a sole proprietor model, where the taxation would be based on individual tax slabs. Future, companies under Startup India and those that are MSMEs get attractive benefits.
Under the Finance Bill of 2018, the taxation of private companies for the Assessment Year 2019-20 is as follows:
If the gross receipts in the previous year (2016-17) doesn’t exceed INR 250 Crores
25% of Net Profit
All other cases
30% of Net Profit
Surcharge: If income exceeds INR 1 Crore
Surcharge: If income exceeds INR 10 Crore
Health and Education Cess
4% on the aggregate of income tax and surcharge
Dividend distribution tax
15% (Plus Surcharge and Cess)
In 2017, a new section was introduced in the Income Tax Act. Section 80 IAC provides a 100% deductions of the profits of ‘eligible start-ups’ for three consecutive years out of seven years.
‘Eligible business’ of start-ups includes innovation, development or new processes and products, or any new services based on new technology and intellectual property. This includes scalable business models that have a high potential to generate wealth and employment opportunities.
A privately limited business structure is ideal for those businesses to looking to gain external funding for business development without the dilution of the founder’s interest in the company.